Just what the doctor ordered?

A high-tech health care future is starting to take shape today, creating investment opportunities along with it.

By Kelly Bogdanov

The sweeping innovations in the global technology sector are not happening in a vacuum. Increasingly, other segments of the worldwide economy are benefiting from high-tech advances.

We believe the health care industry stands to gain as technology will play a greater role in transforming patient care and speeding up the development and delivery of medical advances, while at the same time opening new frontiers of growth for companies involved.

In the past, health care has been “notoriously technophobic,” according to a top-ranked medical university in tech-rich San Francisco. But that is changing as tech-related innovations begin to bear fruit for the industry.

There are a myriad of ways tech and health care “convergence”—the intertwining of the two industries—could bring about additional sources of growth within health care, providing attractive opportunities for long-term investors.

Big data is a big deal

The early stages of tech and health care convergence centered on advancements in electronic medical records. But now convergence is about much more, and partnerships between large firms are becoming commonplace.

The explosive growth of “big data”—massive amounts of digitally generated data that reveal human behavioral patterns—has laid the foundation for health care providers and research institutions to integrate digital technologies into the study of diseases in large populations, in this process, creating a new field of digital epidemiology.

For example, Genentech can analyze billions of patient records in seconds and identify patterns much more effectively and efficiently based on big data systems it has built over the past three years. This speed would have been unheard of for much smaller batches of records even five years ago. This U.S.-based biotech firm, owned by Switzerland’s Roche Holdings, has the most substantial data science unit among biotech and pharma companies worldwide.

App, app, and away

Convergence will not stop with big data.

More advanced data methods, such as artificial intelligence (AI) and machine learning, will likely play a greater role in disease management and will enable health care practitioners to customize treatments based on specific, individual needs.

Health care providers are already taking the first steps in communicating with patients via tech apps. The Mayo Clinic provides first aid advice through Amazon’s Echo devices. Users can ask Mayo what to do about minor ailments or illnesses. It is powered by Alexa, Amazon’s cloud and AI-based personal assistant service.

In coming years, mobile applications and devices will increasingly monitor chronic diseases and treatments on a real-time basis. Patients may ultimately get advance warning of potential health problems before they even have symptoms.

Following are just two examples of advanced data initiatives that could take health care well beyond our imaginations of just a few years ago.

Medical device firm Medtronic is partnering with IBM’s Watson supercomputing unit to analyze data from 125 million diabetes patients. Watson’s machine learning architecture will power Medtronic’s diabetes apps with real-time glucose data to help patients more effectively and easily manage the disease. And the technology should enable Medtronic to improve diabetes treatments overall.

Chinese startup iCarbonX seeks to capture DNA data, other biological samples, and a myriad of health, lifestyle, and environmental data in order to continuously monitor users’ health and recommend wellness programs and behavioral changes, potentially before illnesses or diseases strike.

iCarbonX is no ordinary startup. Its founder hails from one of the world’s leading genomics firms and it has financial backing from WeChat, China’s biggest social media app, which is owned by internet giant Tencent. It is one of more than 100 AI-oriented health startups worldwide that have cropped up in the past few years, according to CB Insights.

Paging Dr. Robot

We find the area of surgical robotics particularly compelling due to the potential health benefits and market share gains.

The integration of robotics into general surgery procedures should increase significantly in coming years. It could reduce surgical complications, thereby improving patient outcomes while cutting costs.

RBC Capital Markets estimates that robotics represents only 5% of the U.S. general surgery market, and could gain share quickly. Based on our analyst’s survey of surgeons, robotics is now used in roughly 15% of colorectal procedures, but that could rise to 39% in five years. Robotic devices play a role in about 9% of hernia surgeries, and could increase to 31% five years from now.

Survey question of spine surgeons: If you have not been trained on any robotic systems for spine procedures, do you expect to be trained over the next 24 months?

Intuitive Surgical is currently the surgical robotics market leader, but other companies are challenging the firm.

For example, diversified health care heavyweight Johnson & Johnson and Verily Life Sciences, a unit of Alphabet (the group of companies that includes Google), are partnering to develop surgical robots through startup firm Verb Surgical. It seeks to take the technology to the next level. In an interview with MDDI Online, Verb’s CEO said, “We call it digital surgery … Instead of having robotics that is used in just 5% of procedures and it’s like a mainframe computer, we’re thinking of robotics like it’s a PC. It’s always there, it’s always on.”

Percentage of respondents willing/unwilling to engage with AI and robotics for their health care needs (by age)Survey of adults in Europe, the Middle East, and Africa

Source: PwC survey, June 2017

The future is arriving

There are many other convergence initiatives in the works or already in the market.

For example, what is normally found in a semiconductor chip is being integrated into contact lenses. Alcon, an optical division of Switzerland-based Novartis, is partnering with Verily to develop “smart” lenses for diabetics that can continuously monitor glucose levels. The lenses actually contain tiny integrated circuits and sensors, and can communicate via wireless technology.

U.K.-based GlaxoSmithKline (GSK) is working with Verily on bioelectronics innovations, specifically for neurotransmitters. Researchers are attempting to fine tune nerves in order to regulate a group of neurons and improve patient outcomes for those who don’t respond to traditional treatments.

Using supercomputing simulations, engineering, data science, and AI, GSK is also attempting to significantly accelerate cancer therapy development from the current six-year average to only 12 months as part of a newly formed public-private consortium that includes Lawrence Livermore Labs, the University of California San Francisco, and the National Cancer Institute.

The field of medical imaging could also see big changes. The equipment will likely become much smaller, cheaper, and more efficient as deep learning technologies are integrated.

Also, virtual reality is being incorporated into medical school curriculum and research methods. It can do what textbooks can’t. Students can “move” anatomy, from skin down to bones, and can even zero in at a microscopic level.

Scratching the surface

This is just a sampling of the innovations that are in the works as the fields of technology and health care become intertwined. The potential for convergence to spark other productive advances seems open-ended to us at this juncture.

While we favor investments in the Health Care sector over the near term due to attractive valuations and what we perceive to be overblown pricing and regulatory risks, the convergence of tech and health care has us enthusiastic about the sector’s long-term potential as well.

Non-deposit investment products offered through RBC Wealth Management are not FDIC insured, are not a deposit or other obligation of, or guaranteed by, a bank, and are subject to investment risks, including possible loss of the principal amount invested.

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